Who Do We See About This?

In 2009, Bernie Madoff pleaded guilty to 11 felony charges in connection with a "Ponzi Scheme" that he had run for several decades and resulted in investors being defrauded of approximately $18 billion.  For this, he was sentenced to 150 years in prison. It has yet to be determined if others with his firm (sons, brother, accountant) will be jailed as well (note: revised 1/20/2013 - Bernie Madoff's brother will serve 10 years in jail).

What is a Ponzi Scheme?

According to the government's website (sec.gov), " A Ponzi Scheme is an investment fraud that involves payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk." [1]

It goes further to state what causes a Ponzi Scheme to collapse:

"With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when large number of investors cash out." [1]

How does the US Social Security System Meet this Definition?

Going forward there are fewer and fewer people paying into the system compared to those who will be receiving benefits. All of the baby boomers will be over the age of 65 by 2029. With fewer people contributing to the system, and more people claiming benefits, this will place a greater burden on the Federal Government. It will become increasingly difficult for the government to meet these obligations without either increased revenue or serious changes in the way benefits are calculated.

Interestingly, the blame for this situation is bi-partisan. The drug benefits signed into law by George W. Bush certainly added to the growth of the obligations aging America will come to expect.

So, if we as citizens are paying into a system that relies upon future contributions for us to see "a return of our capital", what should we call it?

Truly, most of us do not want to see people currently relying on payments, to take less out of the system. At the same time, our elected officials need to come clean. They are making promises they cannot keep. They are building up expectations that will be difficult to meet. It is time for them to deal with the baby boomer bubble so we can better understand what will/will not be there for our retirement.

Lastly, it gets worse. If not properly dealt with, entitlements become the budget. In 1962, defense spending accounted for 51.7% of every federal dollar spent; in 2011 it is 22.6%. Conversely, Social Security accounted for 14.8%. There was no Medicare at the time. Medicaid was 1% of the budget (15.8% total). In 2011, Social Security accounted for 19.8%, Medicare 13.1%,  and Medicaid 10.1% - or 43% of the total Budget (this does not include government-sponsored safety-net programs like Food Stamps - which have grown from 5.8% to 12.6%). [2]

 

 

[1] www.sec.gov/answers/ponzi.htm

[2] Office of Management and Budget - Lam Thuy Vo of NPR is credited with the research.